Don’t put off saving for retirement

Pick one: immediate gratification or future satisfaction

If ever you’ve been faced with the choice between immediate gratification and future satisfaction then you have no doubt experienced the inner conflict over what researchers refer to time preference.

And that conflict can often lead to self-control problems, especially when it comes to building an adequate nest egg for retirement. Non-savers, as you might imagine, prefer immediate gratification while savers, no surprise, prefer future satisfaction.

But why do some people have trouble with self-control and others not so much? And, more important, what can you do if you’re having trouble with self-control — that is, saving for retirement?

A problem of nature and nurture

Regarding the first question, at least one expert said the difference between households with self-control and those with little or no self-control stems partly from nature and partly from nurture. “Genes do matter, and some people have better mental control technologies than others because of the way brains are wired,” said Hersh Shefrin, a professor at the Leavey School of Business at Santa Clara University. “For some, regions of the brain that provide ‘oversight’ are more active in some people than others.”

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Are you an ant or a grasshopper when it comes to saving?

In addition, Shefrin said, the data also shows that higher levels of education appear to matter. “The more educated are better at setting budgets,” he said. “The direction of causality might be two way here, so it might be more than the fact that better educated people learn how to set budgets effectively.”

Other researchers have a different point of view. “One simple answer is how people value costs that occur in the future vs. those in present,” wrote Kyoung Tae Kim, Jae Min Lee, and Eunice Hong, all Ph.D. students or candidates at Ohio State University, in an email to me. “People might have different discount rate (different time preference). For example, people who are present-oriented discount future much (high discount rate) while people who are future-oriented discount present heavily (low discount rate).”

Kim, Lee, and Hong recently examined the Survey of Consumer Finance from the 1995 to the 2007 and found that about one in five American households have self-control problems when it comes to saving, though even more have self-control problems when it comes to making loan payments or paying off monthly credit card balances.

For instance, nearly 53% of households have a problem with loan payments (they’ve been late making a loan payment during the past year; or they’ve been late making a loan payment for two or more months in a row; or they’ve declared bankruptcy; or they don’t pay off their monthly total balance owed on their credit card account) and slightly more that 56% households have a problem with credit cards (they have a balance still owed on their credit cards after their last payment).

Not surprisingly, Kim, Lee, and Hong found that households with self-control problems were less likely to be on track for an adequate retirement than households without self-control problems. And those households, said the authors, must find ways to “alleviate” their self-control problems, especially in the field of saving decisions and debt.

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